LevelTen VP of M&A Solutions discusses oversaturation of ERCOT battery market

In an interview with NPM, LevelTen Energy’s VP of M&A Solutions Patrick Worrall discussed the oversaturation of the energy storage market in Texas and one potential policy change that could turn it around.

Worrall says LevelTen has hosted roughly 2 GW of pre-construction M&A storage transactions in ERCOT over the past couple of years. While he says these transactions started at 6 cents per watt pre-IRA, they have since come down to between 4-6 cents per watt following a brief land grab period that saw prices spike up to the low teens immediately after the IRA was finalized.

Texas has seen a massive explosion of energy storage development so far this decade with less than 800 MW installed by the end of 2021 jumping up to over 2 GW in 2022 and over 5 GW in 2023. Worrall says early investors like UBS, Excelsior, Acciona, Key Capture and Jupiter Power came in with the view of putting in USD 1 to 2bn into the energy storage market and “did really well.”

However, he says buyers are now taking much smaller bets on the M&A market, mostly buying up singular projects at a time for USD 100m to USD 150m rather than large-scale portfolios. As a result, he says the ERCOT energy storage market is now a buyer’s market with over 100 GW in the queue, “most of which is not being developed by companies that actually planned on putting the construction capital in.”

Worrall says most of these projects are late-stage, de-risked projects with the land acquisition, title, permitting and interconnection stages complete. He says these projects are typically at the two-hour duration mark, though he is seeing an increase in four-hour projects. In general, he says these projects are ready to pay their interconnection deposits that make up almost all of the M&A activity in the state with very few earlier stage projects getting sold.

Overall, Worrall says he is seeing a “huge amount of volume on the supply side and very limited construction capital coming into the market,” due to a “pervasive view of saturation.” However, he says he’s “not sure the fundamentals support that view.”

“There is a lot being built, but it’s not as much, maybe, as people think,” Worrall said. “Analysts are suggesting there is opportunity for 20 to 30 GW [to be installed in Texas] before you see real saturation. I don’t think that is currently funded.”

Worrall notes this situation is unique to the storage space in ERCOT thanks to the “massive bubble of development that went on” post-IRA. He notes that a lot of developers active in solar switched over to start developing storage during this period, further contributing to the overabundance of supply.

“[Unlike a solar or wind project], it’s quite easy to find 10 acres to go and develop a storage site,” Worrall said.

However, Worrall says construction of projects overall has slowed in ERCOT, corresponding to a general trend in the US market thanks to queue delays and increasing construction costs.

“In ERCOT specifically, you’ve got 130 GW of storage in the queue,” Worrall said. “That’s not going to get built.”

In particular, Worrall says the ERCOT queue, which has “always been the golden child of interconnection queues,” is seeing interconnection timelines balloon from 18 months to as high as 36 months thanks to a lack of availability of breakers and transformer equipment.

On the other hand, Worrall says these dynamics aren’t really affecting the market for distribution-connected storage projects in ERCOT, which are projects below the 10 MW mark. These projects are able to get connected without having to go through the lengthy interconnection process that utility-scale projects experience.

However, Worrall notes that it is typically a different asset class interested in these projects vs. the utility-scale developments, so the two markets aren’t particularly related despite the overlap in technology.

Worrall notes that market dynamics are always changing in ERCOT. For instance, he says he is seeing a lot more solar M&A get done today than six months ago thanks to economic PPA prices in Texas vs. larger markets like PJM and MISO.

On the storage side, Worrall says an ERCOT announcement of an expansion of ancillary services, which are largely utilized by storage bidders, would likely lead to another uptick in storage M&A and development. Without that, he says a milder summer than Texas experienced over the last two years will likely lead to further declining revenues for storage owners thanks to a decrease in energy arbitrage and volatility.

“Ancillary services are where things are really saturated in ERCOT,” Worrall said. “Other than that, you’re talking about what happens in the regular markets. And while it’s certainly pretty hot in Texas this year, it’s nowhere near as bad as last year. So, you’ll likely see forward revenues decline.

*This story was originally published exclusively for NPM subscribers last month.

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